Why are Credit Card Rates so High when the Base Rate is so Low?

It has been widely reported over the last week or so that credit card interests rates have just hit a 13-year high, a story covered by this blog on February 2nd. This may seem very unfair, especially when you look around at how interest rates in other areas are going.

For savers, it's hard to find the ideal place to stash the cash these days, with building societies and banks offering top rates of only around a measly 2.9%.  That's considerably lower than the 18.9% reported average interest currently charged on new credit card accounts.

In the post Credit Crunch world you can't even take if for granted that your savings are going to be 100 % safe: remember Northern Rock, Bradford & Bingley and Icesave, to name but a few recent disasters. Make sure that when you look for a safe home for your savings, you pick a UK regulated bank or building society account.  That way, up to £85,000 of your cash is protected under the Financial Services Compensation Scheme.  Those people lucky enough to have larger sums to invest should ensure they spread it around several accounts with different financial institutions, depositing no more than £85,000 in each.

The base rate has been at a record 0.5%  low for several years now, and home-owners are enjoying rock-bottom repayment rates on their mortgages.  So why is it that credit card customers can't get a piece of the action and benefit from the low rates too?

The answer is that the rates charged by the card companies have no direct connection to the base lending rate, but are much more influenced by risk factors  likely to affect the consumer's ability to pay back their loan.  So when setting repayment rates, the lenders are taking into account a variety of things like income levels, job security, rising unemployment, the rate of business failures, bad debts, and personal insolvency.

There are still some good deals, such as zero balance transfers, to be had, but card lenders are a conservative lot and increasingly choosy about who can get them.   Banks and card companies point out that they have to cover the cost of fraud, bad debt and administration,even when base interest rates are low.  For those who remember to pay their cards off in full every month, the credit they are getting remains free, in spite of the headline-hitting high average rates.